Consolidation talks are perennial in the battered us oil and gas sector. but until recently they rarely amounted to anything more than that. despite the collapse in oil prices, deals worth more than a few billion dollars have been scarce.

Signs of an m&a thaw are appearing. on monday, devon energy agreed to buy rival shale oil producer wpx for $5.7bn, including debt. the all-stock deal comes just two months after chevron snapped up noble energy at an enterprise value of $13bn.

The nascent round of e&p mergers will differ from previous get-togethers in one key respect: buyers are not going to over pay. especially not for beaten-up small or medium-sized shale energy producers.

Devon will be paying a premium of just 2.6 per cent to own approximately 57 per cent of the new combined company. chevron paid a mere 7.5 per cent premium for noble. to appreciate how low that is, look back 18 months to when occidental petroleum shelled out $56bn, including debt, for anadarko petroleum. that cash-and-stock offer featured a hefty 62 per cent premium.

No company wants to sell itself for stock offered at a skinny premium. that is one reason deal activity in the sector is at an 11-year low. the value of us energy m&a so far in 2020 is $86.2bn, according to refinitiv. that is half the value recorded at this time last year. of the 362 deals struck in 2020, less than 15 have an enterprise value of more than $1bn.

Yet with oil prices at around half their 2018 levels, losses mounting and net cash positions dwindling, smaller shale players are running out of road. before monday, devons shares had dropped about 63 per cent over the past 12 months. wpxs were down around 58 per cent.

Pooling resources makes sense. combined, devon and wpx will become the fourth-largest us shale oil producer by output. the proposed $575m in annual cost savings, taxed and capitalised would cover the bid premium by more than $4.5bn. shares in both companies leapt. no need for a blowout cash offer when the combination rationale is this sound.

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